Why DOJ Needs To Extend Anheuser-Modelo Consent Decree

In 2013, the U.S.Department of Justice required Anheuser-Busch InBev (ABI) to grant a perpetual and exclusive U.S. license to some of its Grupo Modelo Mexican beer brands that were at the time competing in the U.S. market, including Corona Extra, Modelo Especial and other popular brands, to Constellation Brand Inc.[1] In addition to the sale, the DOJ put a number of conditions on ABI to ensure that the Grupo Modelo Mexican beer brands, including Corona, remained competitive in the U.S. market, including critical protections to make sure distribution was open and independent. This summer will be the third anniversary of the sale of the Modelo American portfolio to Constellation and the lapse of important protections could leave many Corona consumers scrambling to find their beer of choice.

Prominent among the conditions the DOJ required in its consent decree was the sale of the Piedras Negras Brewery in Nava, Coahuila, Mexico to Constellation. The sale was required so Constellation can brew the Modelo brands itself for importation into the United States, and not rely on its chief competitor, ABI. Accompanying the sale of Piedras Negras was a condition that Constellation obtain its supply of necessary materials from ABI for a three-year period. That provision is about to lapse.

A couple of months ago, ABI and Constellation agreed to extend their supply agreement by another year, making Constellation dependent on ABI for necessary inputs through June 2017. However, this reliance on its chief rival for inputs with no extension of other important protections will be a recipe for disaster, as Constellation is still in the transition of becoming a fully independent brewer. Reliance on ABI has not entirely helped it in its transition, and Constellation is still in a very precarious position. For example, there have been two recalls of Corona due to defective glass bottles in less than two years.

In addition to the supply agreement, the DOJ required protections for independent ABI beer distributors carrying the Modelo American portfolio brands, which have been pivotal to the success of Constellation’s stewardship of the Modelo American portfolio brands. In its review of the ABI/Modelo deal, the DOJ stated that “[e]ffective distribution is important for a brewer to be competitive in the beer industry.” Recognizing that independent distribution is the artery that spurs consumer choice and the explosion of craft beer, the DOJ prohibited ABI from adversely affecting a distributor’s ability to carry the Modelo American portfolio brands, including Corona, for a three-year period.

ABI is known to offer incentives and other tactics to exclude craft and other non-ABI brands from independent distributors’ brand portfolios. In fact, ABI’s current distributor incentive program already encourages the exclusion of non-ABI brands in exchange for marketing payments and favored position. ABI will soon be able to use these incentives and tactics against the Modelo American portfolio brands, including Corona. Accordingly, there is substantial concern that ABI will attempt to ice Corona out of many distributors’ portfolios once this protection provision expires this summer.

Indeed, ABI has strategically timed the roll out of its Mexican beer brand Estrella Jalisco (also under the Modelo brand, which is controlled by ABI outside of the United States), designed to compete with Corona in the U.S. market, to roughly coincide with the lapse of these protection provisions as well as the important Cinco de Mayo and kick-off of summer sales seasons. ABI will undoubtedly push its independent distributors to shift focus away from the Modelo American portfolio brands, including Corona, to Estrella Jalisco once the DOJ protections expire in June.

The DOJ’s consent decree and the protections put in place for distributors of the Modelo American portfolio brands have undoubtedly allowed it to flourish over the last few years in the United States. Hence, Constellation’s growth has exploded since the acquisition of the U.S. rights to the Modelo American portfolio brands, and its growth has far outpaced the overall growth of the U.S. beer market.

To keep the U.S. beer markets competitive, the DOJ needs to act to extend the consent decree and the protection of Constellation through independent distributors or risk losing this important source of competition that gives consumers choice and keeps prices down. The marketplace will be able to “find their beach” if ABI is prevented from pushing out the competition.
[1] Final Judgment, U.S. v. Anheuser-Busch InBev SA/NV and Grupo Modelo S.A.B. de C.V., No. 13-cv-00127-RWR (D.D.C. Oct. 24, 2013), ECF No. 48.

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